This is iA the most comprehensive resource for this question on the internet.
We present views from IslamQA, Seekersguidance, and Islamweb, then our resident expert Mufti Faraz Adam presents his views, and finally IFG present a commercial perspective on the matter.
View One: Islamqa
If the Forex system involves leverage or margins, then it is haraam, because this is combining payment in advance and brokerage. This has already been discussed in the answer to question no. 125758.
If it involves margins and rollover fees, then it is even more emphatically haraam, because it is combining payment in advance and brokerage with riba-based loans. Please see the answer to question no. 106094.
If the transaction is free of the things mentioned above, and a person deals with his own wealth only via the Internet, then that is permissible, subject to two conditions:
- That immediate exchange, as prescribed in Islamic teaching, takes place when purchasing currencies;
- That there is no trading in anything that is haraam, such as options, futures, bonds and mixed or haraam shares.
With regard to trading without capital through the website of the XM company, we could not find any detailed description of that, but we should point out that the CFDs (contracts for differences) on the company’s website are haraam contracts, as they are contracts involving options and futures, which are mentioned in the statement of the Islam Fiqh Council quoted in the answer to question no. 106094.
The Islamic Fiqh Council in Jeddah, no. 63, stated in its sixth session that options are not permissible according to Islamic teaching, because the object of the contract is neither wealth, nor a benefit, nor a financial right that may be compensated.
Similar to that are contracts involving futures and indicators. End quote.
Contracts for differences or CFDs are defined as follows:
an agreement between two parties, who are usually referred to as the purchaser and seller, the value of which is based on the underlying asset (for example, the stock index, stock or futures contract) at the end of the contract, or when the parties concerned decide to close the deal. At that point, the seller pays the difference between the current price of the underlying asset and its price when opening it for the purchaser. That applies if the value of the underlying asset has risen. In the event of the opposite, if the value of the underlying asset has dropped, then the difference between the current price and the original price is negative, in which case the purchaser pays the difference to the seller.
End quote from http://www.ifcmarkets.com/ar/cfds/what-is-cfd
This is in addition to the fact that the Islamic Forex account on the website includes leverage, so it is haraam, as noted above.
And Allah knows best.
View Two: Seekersguidance
In and of itself, currency exchange (sarf) is permissible, as long as certain conditions are met, such as the transaction be done hand-to-hand without delay. [Mawsili, Ikhtiyar]
However with respect to forex trading in particular, Mufti Taqi Usmani — leading contemporary Hanafi scholar and Islamic finance expert — believes it to be impermissible, due to various problematic elements associated with this form of trading.
And Allah knows best.
View Three: Islamweb
It is not permissible for you to invest the money in these companies that you mentioned in the question because of the forbidden matters in their dealings, like the Mudhaarib (i.e. the one who manages the investment) conditioning a percentage from the capital money and not from the profit, and conditioning guaranteeing the money of Mudhaarabah. In addition to this, currency trading via the internet includes many prohibitions.
Mufti Faraz view:
In my view, majority of the retail forex trading platforms do not satisfy the Shariah compliance requirements and are therefore not Shariah compliant. Retail conventional Forex trading, where individuals are merely speculating on currency pairs, is non-Shariah Compliant. Brokers which offer Islamic FX accounts advertise their product with ‘no rollover/swap fees’. What is more important and crucial to determine is whether there is actual trading and exchange of currencies in Islamic FX products.
The Fiqh (jurisprudence of the answer):
After reviewing dozens of materials and speaking to a number of Forex brokers, I am of the view that retail forex practiced by private investors and speculators is a form of non-deliverable trading agreements, where delivery of the currencies never takes place. A spot forex is an agreement to exchange a set amount of one currency for another at a predetermined exchange rate in two business days (T+2). In speculative trading, nobody actually wants to do the currency exchange, so at the end of each day, to avoid the exchange in two days, they offset their open position, and then re-open to start the new trading day. There is no “liquidating” of positions because there is nothing to actually liquidate.
When you do a trade, it’s as if you are borrowing the short currency at its overnight rate, exchanging it for the long one, and depositing that at its overnight rate. So if you go long USD/JPY it’s as if you are borrowing yen at the JPY overnight lending rate, converting them to dollars, then depositing the dollars at the USD overnight deposit rate. The carry is the difference between what you pay on the loan and what you receive on the deposit. When you close out your trade you reverse the process. Some brokers handle carry separately, while some incorporate it into the position rollover. (Note the “as if”. These actual transactions don’t really take place.)
Now, if you’re wondering why you see the carry on the T to T+1 rollover if the exchange doesn’t take place until T+2, it’s because your P&L is credited immediately for the overnight carry you will pay/receive going from T+2 to T+3. That’s also why you don’t see carry the day you close a position.
Thus, in retail forex, there is no actual trading of any currency. The entire industry is speculative.
There are multiple products offered by conventional brokers in non-deliverable FX trading such as:
- Contracts for Differences (CFDs)
- FX futures
- Spread betting
- FX options
- Spot FX
All of the above are non-compliant with Shariah due to the following reasons:
Invalid commodity in Shariah
There is gross Gharar (uncertainty) in forex trading. The outcome of the open position where money has been staked is subject to Gharar. This Gharar is in the interim of a transaction and a component of the actual trade. This is different to purchasing shares, as one actually purchases a known subject matter. The transaction of purchasing shares is therefore free of Gharar. Its performance of one’s owned asset which is speculative – which is the nature and reality of all trade and business. Uncertainty in shares is therefore ex-post, whilst in FX trading it is ex-ante and during the trade.
Further, an FX trade does not involve any valid Shariah compliant commodity. One is taking a position on the movement of a currency pair. This is a Qimar (gambling) transaction as one is staking his wealth against his broker. The one who speculated correctly makes a profit at the expense of the other.
In futures transactions, because neither counter-value, is present at the time of contract, it is a mere exchange of promises. Futures trading, where both counter-values are deferred, is exchange of one debt for another, i.e., bay’ al-kali bil kali (a sale of two deferred counter-exchanges). The deferral of both counter-currencies results in a deferred transaction.
Deliverable Forex, which is open to companies and big firms, is different. In deliverable FX, there is actual trading of currencies. Deliverable FX has the potential to be Shariah compliant if other requirements of Shariah are fulfilled.
The IFG view:
In our view any “Islamic” accounts offered by forex companies is not properly Islamic.
We would strongly advise against getting into forex for Muslims, but also for non-Muslims due to the deep risks attached to it.
The operators of these companies don’t fully understand what Islamic law says about forex and are just trying to put a veneer of Islam over their products.
Forex is at heart a financial instrument (as opposed to dealing in the currency itself) and for it to be worthwhile there is leverage involved.
Most people who engage in forex lose money – and they lose it to people like eToro and other providers who can make money off losing trades. In fact, our understanding is that 80% of people who participate in forex lose money.
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